Sale of Home - Rental

[S T]

I have not prepared one of these before

Personal residence for over 10 years - converted to rental October 2010 - Sold Oct 2012 (while a rental)

Do I understand correctly that any gain after allowed personal residence exclusion is reported on 4797?

Thanks

Sandy

[Matt Sova]

Recapture

You have to recapture the depreciation taken.

[Nashville]

Two Phases

I believe calculation involves two phases Sandy. I believe you DO need to start with the 4797.

Depreciation is recaptured no matter what. This is virtually absolute. The remaining profit or loss is treated according to the residency rules which may (or may not) allow treatment of the property as a personal residence.

If, after recapturing depreciation, there is still a profit, this would result in capital gain treatment, and this portion would flow to Schedule D from the 4797. However, at this point, the question becomes whether the capital gain itself is taxable.

That question is best answered in the length of time taxpayer was a resident. If they had never left the house, they have an unmitigated $500K exemption. But this exemption phases out the longer the taxpayer was not living in the house. I believe I am correct in stating if he has not been in the home ANY of the last 5 years, the exemption is totally gone. At any rate, you need to calculate how much of the exemption he has left. If it is greater than the capital gain, then negate the Schedule D by adding a line item to the "cost" only and indicate Section 121 on the line. The taxpayers' cost should be reported as his original purchase price if there is a gain.

If the result after recapturing depreciation is a loss then: 1)The loss will NOT transfer to Schedule D but remain on the 4797, and 2)The basis is NOT his original purchase price, but the LOWER of FMV at time of rental or original purchase price.

Get any snow in NC on this March 26th? Gee I sure am glad Spring has come to Tennessee. [Brrrrrr!!]

[taxmom34]

are you guys reading this right? rental was only for 2 years, (oct 2010 to oct 2012) can be treated as sale of personal residence, basis reduced by depreciation taken and no 4797. or did I read it wrong?

[S T]

Thereby my question - I am reading Pub 523, page 15-16 - Example 2

Example 2. William owned and used a house as his main home from 2006 through 2009. On January 1, 2010, he moved to another state. He rented his house from that date until April 30, 2012, when he sold it. During the 5-year period ending on the date of sale (May 1, 2007–April 30, 2012), William owned and lived in the house for more than 2 years. Because it was rental property at the time of the sale, he must report the sale on Form 4797. Because the period of nonqualified use does not include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use.
Because he met the ownership and use tests, he can exclude gain up to $250,000. However, he cannot exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained

My worksheets show I can exclude except for the 1250 recapture as Matt Sova pointed out - I am just trying to get it on the right form, and it appears it has to flow through to the 4797.

Also having some issues getting it in my software correctly, as it keeps wanting to show a gain on the non-qualified period (rental).

At first I was thinking Snags is correct, in that there is a gain on the days calculation for nonqualified use - shows about 12%
(so 12 % of gain which also includes the depreciation for 2 years), but as I keep reading and applying example 2 - which is the same scenario as my client, apparently there is no period of nonqualified use, as client did not re-occupy the property - At time of sale - it was a rental.

Working with the software to produce the proper forms - so now I have only the depreciation, which is carrying to 4797 then to Sched D

Someone please correct me if I am wrong
Thanks

Sandy